The Yield Curve
What it is, why it inverts, what it predicts — the single most-watched macro indicator and why
Since 1955, the yield curve has inverted before every U.S. recession with the exception of one frequently-debated 1966 episode that depending on the methodology either counts as a near-miss or a small false positive.
Eight clean predictions, one ambiguous case, and decades of academic literature trying to explain why a single number — the difference between the yield on a 10-year Treasury and the yield on a 3-month Treasury bill — has been a more reliable predictor of U.S. recessions than any combination of leading economic indicators that economists have tested against it.
The yield curve was inverted from late October 2022 through late 2024 — the longest sustained inversion of the 10y-3m spread in the post-1962 daily-data record per Federal Reserve Economic Data (FRED). For most of that window, the New York Fed's yield-curve-based recession-probability model put the next-12-months recession probability above 50%.
That is the opening. Finishing a lesson is where it stops being interesting and starts being useful: the full lesson runs to 7 sections and ends with 6 practice questions. A free account is what opens the rest, and the other 255 lessons in the Academy with it. No card.
What this lesson covers
- 1Why the curve usually slopes upward
- 2The 10y-3m vs the 10y-2y spread, and why the New York Fed prefers the former
- 3Yield decomposition and the inversion mechanism
- 4Modern U.S. yield-curve inversions and subsequent recessions
- 5October 2022 to late 2024 — the longest 10y-3m inversion in the modern record
- 6Where to see this on the platform
- 7Summary